Buy now, pay plenty later: warnings sound on layby apps

Luke Champion in his Potts Point gym, has used the After Pay app, to buy sport equipment. 28th September 2017 Photo: Janie Barrett

"Buy now, pay later" apps are proving popular with millennials by feeding their desire for instant gratification.

Users can download and sign-up to the apps in a matter of seconds with often no credit checks, enabling them to make snap decisions on purchases.

But are the payment platforms just another all-too-convenient way to gorge on debt with a side-dish of late fees to boot?

That's what consumer advocates (not all of whom are tut-tutting baby boomers) are asking following the extraordinary success of Afterpay, the app that allows consumers to purchase now with repayments over the following several weeks.

While Afterpay is the clear market leader, there are others looking to get a piece of the action.

Modern layby

Afterpay argues it's a modern-day layby service. It allows immediate purchase of the good or service that is paid-off in four equal fortnightly instalments over the next eight weeks for established customers.

With traditional layby, the consumer usually only takes possession of the good following the final repayment.

The instalments are automatically deducted from the nominated debit or credit card account every fortnight.

It started out as a payment service for online retailers but has since expanded to bricks and mortar retailers like TopShop, Cue and General Pants Co.

More than one million people have transacted at least once on the platform, over 7000 retail brands have signed-up to it and more than $1.2 billion-a-year in sales are facilitated through the platform.

Afterpay received a further boost very recently with low-cost airline Jetstar and store giant Target joining the payments platform.

Jetstar bookings are limited to domestic flights of between $200 and $1000.

While no interest is charged to consumers, there is a flat $10 fee on a missed payment and a further flat $7 a week later if the scheduled payment has still not been made.

That means a customer who misses all four instalments would pay a total late fee of $68 for each transaction, regardless of the size of the transaction.

If a customer is late with repayments, the Afterpay app blocks the customer from making another purchase.

Nick Molnar is founder of fintech Afterpay. Photo: Supplied

Nick Molnar, co-founder and head of Afterpay, says about 20 per cent of its revenue comes from late fees and about 80 per cent from retailers who pay a fee to use the platform.

"Our average order value is $140; we are about life's little luxuries and little necessities and not the big ticket items," he says.

Budgeting

Sydney gym owner Luke Champion, 24, came across Afterpay when he was buying some sport shoes on his favourite e-retailer site, The Iconic.

That was six months ago and he has been using Afterpay for purchases on the site ever since.

He likes the fact that he makes relatively high repayments over a short period.

"I like spending $50 every fortnight, rather than $200 in one hit; it helps me to budget," Luke says.

"I could do the same thing with a credit card, but it just makes me feel a little more comfortable in making an unnecessary purchase."

Luke Champion in his Potts Point gym, has used the After Pay app, to buy sport equipment. Photo: Janie Barrett

Luke uses Afterpay for his purchases from The Iconic, on things like shoes and exercise gear, and doesn't use Afterpay anywhere else. He prefers to use Afterpay even if he has the money to pay for the items upfront.

"I can buy something at nine in the morning and can have it in my hand by lunchtime," Luke says.

"I don't have the spend all the money at once and it comes really quickly.".

In the six months Luke has been using Afterpay he has not missed a repayment.

Karen Cox, the co-ordinator at the Financial Rights Legal Centre in Sydney, says Afterpay and its competitors encourage the purchase of items that the consumer often does have the money to buy straightaway.

"For the smaller amounts of a couple of hundred dollars this does not seem too bad, but it's a definite concern for larger purchases of $1000 to $10,000," Cox says.

Bessie Hassan, money expert at comparison site Finder, says buy-now pay-later platforms can certainly be a convenient option, particularly for those who can manage their cashflow responsibly.

However, consumers should ensure they use them wisely to avoid being stung with late payment fees, she says.

Jetstar is one of the companies that uses afterpay. Photo: Supplied

"The key is to live within your means - if you can't afford it now, perhaps you can't afford it full stop," she says.

"Don't view this option as a shortcut - you will have to pay it back entirely within the required time-frame," Hassan says.

Credit rating

Retailers on the Afterpay platform have a limit per transaction of $1500, with most having a limit of $1000.

Cox says even with smaller amounts, consumers have to be careful as they risk damage to their credit report if they can't pay back in accordance with the terms.

Molnar argues its customers are financially responsible adults and savvy spenders looking to secure their next fashion purchase or travel adventure today.

He says that 85 per cent of Afterpay transactions are paid-off with debit cards, rather than credit cards.

Mitchell Watson, the research manager at comparison website Canstar, says while these "buy now, pay later" apps may not charge interest you can still be stung with late fees.

"And these fees can have a similar impact to paying interest," he says.

"If you make repayments using a credit card you could end up with long term and expensive credit card debt," he says.

Openpay's business model is similar to Afterpay's, but allows for more expensive purchases than the maximum $1500 per purchase limit of Afterpay.

The consumer chooses the frequency of repayments and period of time over which the purchase is paid off.

Openpay may charge a processing fee of up to $4 for each purchase with repayment plans with longer terms.

There could be an initial deposit that the consumer has to make on opening an account, there can be an establishment fee and there are late fees.

Line of credit

ZipMoney is different again. The company has two offerings.

There's the same-named ZipMoney, which is a line of credit up to where interest is charged after 3 months; though there are longer "promotional" periods before interest is charged.

Peter Gray, the company's co-founder and director, says the interest rate is 19 per cent a year with less than 15 per cent of customers paying interest..

It has been going for four years and has more than 5000 stores accepting the payment platform. There are credit checks on customers who use ZipMoney.

ZipPay is a digital wallet with a line-of-credit up to $1000.

After the initial fee-free period, if there is a balance owning on the first of each month there is a flat $5 fee, but no interest. There can be credit checks for those using ZipPay. Minimum monthly repayments are required on both offerings.